Increase your financial security through leasing

Increase your financial security through leasing

As the Bank of England warns that the global credit crunch will worsen in 2008, Stuart Walsh, Managing Director of Franchise Finance, looks at the benefits of leasing as an additional source of funding for a Franchise

The Bank of England’s recently published Credit Conditions survey showed that lenders had embarked on a dramatic clampdown on borrowers in both the household and corporate sectors after turmoil in money markets across the world. This will make it increasingly difficult to secure debt over the coming year, causing a rise in both personal and corporate insolvencies, the Bank said.

In such uncertain times franchisors therefore need to be aware of all the options open to their franchisees when it comes to financing.

Crunch time

In 2007, US banks provided mortgages to people with poor credit histories or low incomes, known as the sub-prime market. It collapsed last year as many of the loans defaulted and started what we now know as the credit crunch.

These sub-prime loans had been sold on several times to banks around the world and the collapse caused billions of dollars of losses for many financial institutions and the jobs of several high profile bankers. As the banks moved to maintain their own liquidity they stopped lending to each other; companies that depended on this interbank market suffered with some headline failures such as Northern Rock.

In the wake of all this turmoil, with the banks seeking to minimise their risks and maximise their liquidity, it could get a lot harder to raise financing. The Bank of England commenting in January gave a gloomy assessment and said that firms had found it harder to borrow funds towards the end of 2007. The cost of financing could also get more expensive as financial institutions look to increase their margins to cover losses; therefore, franchisors may well have to review their franchise business plans to update them.

Lend a hand

For franchises that have an equipment requirement, a leasing scheme could prove an invaluable addition in 2008. We have been advising franchisors for nearly thirty years that their franchisees should have a balanced approach to financing and not put all their eggs in one basket. A mix of cash, bank loan and leasing would deliver this.

A leasing option would provide a fixed monthly payment for the franchisee to cover their equipment requirements, spreading the cost over the useful life of the equipment. The fixed nature of the payments takes away the uncertainty of changing interest rates. Some of the franchisors we work with use leasing to provide a replacement or refresh cycle that ensures the franchisee updates his equipment or refreshes a shop environment on a planned basis. As a result, this maintains the quality of the franchise brand.

Practical steps

Establishing a leasing scheme is quite straight forward and a franchisor will need to be able to demonstrate a sound concept and ethical practice. This is also a way of providing added value to your new and existing franchisees. It would reduce the amount of capital required by the franchisee and could open up your franchise to a wider pool of potential new recruits.

Leasing can be used to finance the tangible items in the franchise such as capital equipment, vehicles, IT and telecoms, however it can also be applied to items such as shop fittings and computer software.

Once a scheme is set up a new franchisee will need to be approved for financing. The information required is typically a copy of the franchisee’s application form and business plan. Assuming that the franchisee has a clear credit history, this approval process will take around 48 hours. A credit search will be performed on the individual franchisee and their permission will be required to undertake this. It is a good idea to ask your franchisees about their credit history early in your application process. Modern day credit checking is very thorough and any previous problems will always show up. It can save you a lot of wasted time if these issues are uncovered early in the process.
 
With the outlook for the economy looking uncertain, putting a leasing scheme in place for your franchisees could prove to be a sound move in 2008.